Anybody who says that the oil companies "price gouge" are pinheads.

The BBQ Pit
141

[QUOTE=gonzomax]
Adam Smith when writing about corporate concentration “they distort the natural ability to establish a price with a fair return for land,labor and capital. to produce a satisfactory result for buyers and sellers and to optimally allocate societies resources”.
Note, the corporate jock sniffers on this board can not see that what they laud is anathema to the capitalistic system. Concentration of power and resources will result in incredible gouging. It has and is now. They must be minimally managed or perhaps broken up.
[/QUOTE]

So what you’re saying is that you’re a pinhead?

142

Does rather sum it up, doesn’t it?

Regards,
Shodan

143

[QUOTE=Maeglin]
Sure. Will the evidence I can get from the internet be a slam-dunk case that will motivate the legislature and/or Supreme Court to action? No. Is it enough to prompt a reasonably thoughtful person to question seriously some of the business practices of big oil? Perhaps. It convinces me to take a deeper and more serious look, and I try at least to be reasonably thoughtful. I don’t have the smoking gun here. It is a spectacularly thorny issue, and it defies pat answers on either side of the debate.

Here is actually a decent summary of some of the issues of competitiveness. Though I do not doubt that political motivation drives this investigation, it is interesting to note the early date. This investigation took place in 1999. I was still in college then, and I could still pay for occasional car trips with my copy center job. It is a pdf, but it is very short.

This is particularly relevant:
This article on the Illinois state government site is also helpful. The FTC has investigated the impact of zone pricing, and according to this article, has found it “ambiguous”. I am not satisfied with this result, personally, and I believe zone pricing should be either implicated or exonerated.

From the congressional record, located here, reference is made to “studies”. Do I have copies of them I can link here? No.

This is some pretty strident testimony from the AG of the state of Connecticut. Again, note its early date. Gas was a thoroughly affordable $2 back then.
[/quote]

I don’t know about any state level stuff, and maybe things vary by state, but any reference you made to federal studies is not going to have concluded to anticompetitive behavior-- everytime Congress has investigated this, they concluded in the negative.

Isn’t that how the no-name gas stations already operate? Around here we have “[url=]Rotten Robbie” stations that get gas from wherever.

144

Question: do the interstate highway program, US Middle East policy in general, a substantial amount of foreign aid, diplomatic effort, and CIA involvement, highway safety administration, the Chrysler automaker bailout, and other government programs count as de facto subsidies for oil companies?

Sailboat

145

[QUOTE=Sailboat]
Question: do the interstate highway program, US Middle East policy in general, a substantial amount of foreign aid, diplomatic effort, and CIA involvement, highway safety administration, the Chrysler automaker bailout, and other government programs count as de facto subsidies for oil companies?

Sailboat
[/QUOTE]

Sailboat, I’m inclined to say that the interstate highway program benefits so many businesses that it’s not reasonable to try to count all the monies spent there as being subsidies for oil companies. Or to put it another way: If the same dollar of highway spending money is considered to be a dollar subsidy for construction firms, small businesses, automotive and truck industries, and oil companies - all at the same time, it seems a pretty effective sort of government spending to stimulate the overall economy.

ETA: This isn’t to say that I think that all highway spending is wisely chosen, or anything of the sort. Just that as a general category, it’s one of the more effective means for the government to spend money to support the economy.

I also assume you’re talking about the big Chrysler loan guarantees (Note: there was no direct money from the Fed, then, but I’m sure that it affected what credit would be available to other would-be lenders.) that Lee Iacocca got from Congress back in 1979. Trying to figure a governmental cost for something that involved no money transfer from the government would be problematical, at best. I don’t say that you wouldn’t be able to come up with some reasonable numbers - just that I’m sure so would many other people, and there is likely to be little agreement between those sets of numbers.

I’m not addressing your other examples, because I don’t know any reason to disagree with you there. There may be some reasons, but I can’t point them at this point, and so am willing to let them stand.

146

[QUOTE=Oredigger77]
The problem with this comes on two fronts. First in producing oil there is a basic cost of business which has increased dramatically so oil companies have to a certain extent eaten these costs. An easy way to look at this is that oil prices are not adjusted up during contract negations between service and oil companies. Secondly Oil companies have multiple buyers for their product one of which is their downstream manufacturers. Not all oil companies have a downstream branch and those that don’t tend to have higher profit margins. This is because the downstream facilities work similar to your coffee shop example.

If major oil companies were split into upstream and downstream companies you would see that downstream does decrease their profit margin. The price of oil in 2001 was $23/barrel while gas prices were nationally about $1.235/gal. As of yesterday oil prices were $113/barrel which should equate with $6.067/gal which obviously hasn’t happened. This is an absorbed cost of business on the downstream side.

Now the upstream side is completely different from the coffee shop example they are selling a commodity just like any farmer. Both of their business models involve selling to the highest bidder. Now with an increase in corn based ethanol the price of corn has gone up because there is more demand, which is lucky for the farmer. I don’t see how this is any different from China using more oil and increasing the price of oil, which is lucky for the upstream producer. Both are reaping a windfall but I’m not sure either is inherently wrong.
[/QUOTE]

Good answer, thanks, and a highly relevant material fact in the middle paragraph.

147

The thing I think people are missing in this whole argument is that you HAVE to do this on the basis of profit margins, NOT on gross profits.

I’ll guarantee you that ExxonMobil’s operating expenses are higher than almost any other company’s revenues out there.

They only make about 10% more than they spend, overall.

By way of comparison, look at the (rough)profit margins of these companies:

ConEd: 7%
Entergy: 10%
Exxon: 10%
Anheuser-Busch: 9%
Apple Computers: 15%
IBM: 10%
Miller Brewing: 10%
Google: 25%
Microsoft: 30%

Exxon has the LARGEST profit margins of the major oil companies, with most being under 10%.

It’s just that some of you can’t divorce the concept of an objectively huge profit in dollars with the concept that it’s only 10% more than what it cost them to make it.

148

[QUOTE=bump]

It’s just that some of you can’t divorce the concept of an objectively huge profit in dollars with the concept that it’s only 10% more than what it cost them to make it.
[/QUOTE]

No, that point was made quite effectively in the OP. What you’re failing to understand is that 10% of 100 is smaller than 10% of 200. And if the gross goes from 100 to 200 by sheer luck, that’s what we call a “windfall.”

There are plenty of good arguments to be made against a windfall tax. But they aren’t being made (yet) in this thread, and profit margin is not one of them.

149

[QUOTE=Richard Parker]
No, that point was made quite effectively in the OP. What you’re failing to understand is that 10% of 100 is smaller than 10% of 200. And if the gross goes from 100 to 200 by sheer luck, that’s what we call a “windfall.”

There are plenty of good arguments to be made against a windfall tax. But they aren’t being made (yet) in this thread, and profit margin is not one of them.
[/QUOTE]

Well, what are the arguments in favor of a windfall tax? Other than pure envy that is.

I mean, what do you think these companies do with all the money they make? High CEO salaries are peanuts in relation to their profits. The money gets sunk back into the business. If you take away more of their profits, you’re going to get less of their (future) product. So if you want to reduce the supply of gas, raising corporate profits is a good way to do that. And what happens when the supply of something goes down? Increased taxes on oil companies is going to mean higher gas prices, not lower.

150

[QUOTE=John Mace]
Well, what are the arguments in favor of a windfall tax? Other than pure envy that is.

I mean, what do you think these companies do with all the money they make? High CEO salaries are peanuts in relation to their profits. The money gets sunk back into the business. If you take away more of their profits, you’re going to get less of their (future) product. So if you want to reduce the supply of gas, raising corporate profits is a good way to do that. And what happens when the supply of something goes down? Increased taxes on oil companies is going to mean higher gas prices, not lower.
[/QUOTE]

Envy? What does that even mean in this context? You think the citizens who are in favor of a windfall tax are envious of a corporation’s profit? Or do you mean envious of the CEOs? I think that’s an extremely uncharitable and simplistic view of the matter.

The argument is that we have to tax something to pay for, among other things, this war. A windfall tax is arguably better than other taxes for two reasons: 1) it doesn’t disincentivize profit as much as a normal tax, since it is applied when luck is involved, not innovation or work and 2) it is fairer than other taxes for the same reason.

Your economic counter-arguments are, I think, compelling. But as you may have noticed, they are entirely unexplored in this thread. So I think I’m quite right that, up until my post, nothing had been said to refute the notion of a windfall tax.

151

Quick query here if I may.

A company basically doubles its profit and does nothing to do so. And people think that’s a good thing? :confused:

Gotta love greed. Or not.

152

Does anyone have any numbers for historical profit margin numbers? Have they in fact doubled in recent history?

If sales double, then I expect net profit to rise in proportion. If sales double and the margin doubles, then to me that begins to sound like gouging (increasing prices disproportionately to whatever their cost is).

153

For years I’ve been hearing people say that US gas prices are excessively low and encourage wasteful practices. Now the prices have gone up and people complain that the companies are making too much money. Apparently gas price increases are only OK if they are the result of inflated gas taxes. Of course, it was shown earlier in the thread that ExxonMobil currently pays $2.60 in tax for every $1.00 in profit they make.

For those that think the oil companies are cheating us, what do you think a fair price for a gallon of gas should be?

154

[QUOTE=Cosmic Relief]
If sales double and the margin doubles, then to me that begins to sound like gouging (increasing prices disproportionately to whatever their cost is).
[/QUOTE]

That’s not what gouging means, as has been pointed out repeatedly

155

[QUOTE=Richard Parker]
Envy? What does that even mean in this context? You think the citizens who are in favor of a windfall tax are envious of a corporation’s profit?
[/quote]

Yes. Either envious or resentful (which is really the same thing). You see it all over this thread.

If we have to pay for this war, we should all pay for it. It’s our policy. As for disincetivizing profit, that’s not really the point. If a company knows it’s subject to “windfall tax”, why wouldn’t they normalize that risk by higher prices all the time-- ie, to compensate for the times when they’ll be hit. That’s what I would do, or try my best to do.

I just don’t understand this luck argument. If they double their profit out of “luck” they’ll double the taxes they pay, as long as we don’t give them a bazzilion loopholes to hide that profit in. Get rid of the loopholes, don’t add some extra tax.

I got really lucky by buying my house when I did. Should I be taxed extra for that? What about all the other folks who bought houses 20 years ago, like me, and even in the current real estate market are still way, way ahead… by doing nothing at all?

Thanks.

156

[QUOTE=RedFury]
Quick query here if I may.

A company basically doubles its profit and does nothing to do so. And people think that’s a good thing? :confused:

Gotta love greed. Or not.
[/QUOTE]

If it was your business, wouldn’t you think it was a good thing? If your house goes up in value by 10% a year for 20 years, wouldn’t you think that was a good thing?

And, as I said in that other post, they should be paying 2x the taxes, too. So, I just don’t see the justification for a windfall profit tax. I have nothing about taxes, as long as they’re dealt out fairly and not used to try and jigger the market. If we need more money in the treasury, then raise taxes evenly across the board. It’s too easy for the majority of voters to vote for taxes that they think only someone else will have to pay.

157

And yet, they always make money. Airlines falling like forsaken sparrows, Big Oil makes money. Banks and investment firms running around like chickens with a radical craniotomy, Big Oil makes money. Democrat administration, Big Oil makes money, Republican administration, Big Oil…well, lets draw a veil over this, this is a family board…

They must simply be smarter than everybody else. No other answer for it, everybody else fucks up, but not the oil industry. (This would explain the draw for a certain bright young MBA to begin his meteoric fall to power.) They’re simply smarter than the rest of the running dogs, they’re the alpha running dog, the sled dog with a view.

Now, some may carp and cavil that they simply* hire* the smartest lawyers, accountants, and Congresscreeps, but, really, isn’t that, in itself, a very intelligent decision? It is wise, is it not, to recognize the limits of ones own intelligence? I certainly hope that I would, if I should encounter any.

But I digress. Through it all, they make money. No matter what, when they come to testify, they aren’t dressed in suits from the Men’s Wearhouse, they don’t take the bus. I put it to you that this can only be the result of a superior cognitive capacity. Either that, or the game is fixed.

(The long association of the Oil Industry with the great state of Texas cannot escape our attention. If anyone can doubt the healthy radiance bestowed by a commanding influence by the oil industry, let him gaze upon the wondrous history of Texas, circa 1900 - ? Gaze, ye mighty, and despair…)

158

Good. These are the kind of arguments that should be offered in this thread. Calling people pinheads without rebutting their arguments is, among other things, counter-productive. I’ll continue to debate, but not because I have a strong opinion either way. My main point was simply to point out that the thread had not rebutted the idea of a windfall tax.

[QUOTE=John Mace]
Yes. Either envious or resentful (which is really the same thing). You see it all over this thread.
[/quote]

Like I said, this is an uncharitable and simplistic. It does not explain the people doing just fine economically who favor a windfall tax. It does not explain the economists who favor a windfall tax. It reduces your intellectual opponents to caricatures, based on armchair pop psychology. I don’t expect better from everyone on this board, but I’ve come to expect better of you.

Corporations are “us.” When we tax a corporation, we are taxing shareholders. Additionally, it might result in higher gas prices, as you suggest. And while some of the revenue would be used to lower this burden on the groups most affected, it would certainly still be a tax we would all pay for.

The oil companies know they are potentially subject to such a tax. They were under such a tax not long ago. If there’s any perverse effect based on the expectation of such a tax, it is already happening. I think that, empirically, such normalizing of risk doesn’t happen for various market reasons.

Taxing windfall is analogous to taxing inheritance. We prefer such a tax because we prefer to marginally disincentivize the activity over further disincentivizing innovation, work, or intelligent investment.

Well, it is certainly true that part of the benefit of a robust and free commodities market is to manage risk. If half the supply of oranges is about to be wiped out, we want there to be a bunch of investment in the supply that will remain.

But I think the oil market is a bit different. The sorts of events we’re trying to manage are tied up with the industry itself–middle east politics, OPEC, climate change, fuel standards, etc. Rewarding those who invest in oil because they expect the President to provoke Iran is not quite the same as rewarding those who invest in oranges (or houses) because they expect the commodity to appreciate. Maybe I’m wrong in drawing such a distinction.

The latter seems more like a windfall than the appreciation of your home (which is not a commodity per se, but I think is analogous. Is there no distinction to be made there? Even if there’s not, it seems to me that we still might want to tax the luck of your home’s appreciation more than we tax your innovation or labor.

159

That’s just sad, elucidator. I thought we were on our way to having a rational dialogue, and here you retreat into “they’re making money, and the only possible explanations are (1) They’re smarter than everybody else, or (2) they’re eeeeeevil.”

If the topic of this thread were UFOs or religion, there’d be no shortage of Dopers pointing out how pathetic this kind of wilful ignorance is. But since it’s about business, ignorance is OK.

Just sad.

160

I haven’t read every post in this thread, but I don’t think this has been covered:

First off, in general, I’m not in favor of windfall profit taxes, and I figure that if you make a product you generally should be allowed to sell it for what you want. I like profits and I think profits are good.

Couple of things:

Just because the spot price for oil is $115/ barrel does not mean that that is what Exxon pays for it, or what it costs Exxon to get it. That’s just the spot price on the market for so many hypothetical barrels of a specific grade of oil that don’t necessarily exist yet, but which are promised to be delivered at a certain time and place should the need arise (and never does.)

Exxon may own land and drill a well where it costs them $14 a barrel to get the oil. Exxon also may have oil that is stored in the ground in existing wells. It may have gotten this oil years ago at $9 a barrel and it’s just sitting there. Exxon may also have oil in storage tanks or at refineries that was acquired at various times in the past at various prices and as the price of oil increases that’s pure profit. Of course, if the price of oil drops that’s losses.

They may also sell gasoline made from oil other than that gotten from the light sweet crude that’s $115 a barrel. They may have made it from other grades or as a result of “cracking” shales or oil sands.

These profits are mitigated by the practice of hedging. I’ll give you an example that works the same for Exxon:

Let’s say you have a local oil delivery company that provides your heating oil. They have a million gallon tank which they fill in August, and they deliver oil November through March. Let’s say the oil delivery company pays $4 a gallon for this oil, but come November the price for oil drops and is only $3.50 per gallon. The Company needs to make .25 a gallon to cover costs and earn a modest profit. Will you as the consumer be willing to pay $4.25 for oil with a market price of $3.50 to support your local business or will you buy oil from somebody else for $3.50?

Chances are you will buy at $3.50.

To protect themselves the oil company hedges it’s million gallons of oil that it buys in August. To simplify, they purchase a put. This put is a financial instrument which gives the company the right to sell a certain amount of oil at a certain price at a certain time. They pay a premium and get the right to sell oil through March at $4.00 a gallon. If the price of oil drops to $3.00 a gallon the price of the put increases buy $1.00 per gallon. The increase in the put offsets the loss in the inventory and they sell oil to their customers at $3.25 for a loss and then sell the put on the market to exactly offset that loss. If the price of oil goes up they sell to their customers at a profit and have an offsetting loss in the put.

Thus, this hedging takes market movement out of the equation in terms of the oil company’s ability to make a profit. They make their small profit regardless of what happens to oil prices and their customers always pay market price. So far, everybody wins.

That’s a gross oversimplification of the hedging process, but in essences that is how it works.

Things get complicated quick from here. What I haven’t explained but which should be obvious is that in the above example you need somebody willing to take the other side of the bet. There are some natural takers. Let’s say you own a plastics company and you just signed a contract to deliver 1 million pounds of plastic next spring. The price per pound has been negotiated and at current market prices you will make a decent profit. However, you don’t need the oil to make the plastic for several months. If the price of oil goes up you will take a loss. So, you take the other side of the bet and buy a call giving you a fixed price for your oil that gives you a profit regardless of market fluctuations. Other natural takers are things like airlines utilities and of course speculators.

(The instruments used are much more complicated than I’ve described and usually are forms of combinations and straddles and various second order derivatives, so all you wiseasses that are going to correct my specifics can just hold your horses. This is just for illustrative purposes.)

This is all good so far. It makes sense and it’s necessary and beneficial to all concerned. What can happen though is that oil can get tight, or more importantly can be perceived to have gotten tight. when this happens more people will be hedging in more of one direction than might otherwise be the case, which leads to more speculation in that direction which leads to more fear which leads to more hedging, and then the very process of the hedging and attempting to stabilize oil prices from market fluctuation actually drives the price of oil way up.

This is what is happening now.

Exxon hedges, but they don’t hedge purely or completely. If they are good at it they leave themselves some room to profit from market movement. Leaving this room takes risk which could work against them.

In case you haven’t noticed there is usually a “bust” after every “boom.” For a while there mortgage and housing companies were making obscene profits. The smart ones positioned themselves so that those profits will see them through the current lean times. The stupid ones are going bankrupt or getting bought out for pennies on the dollar. If we had penalized the mortgage companies for their great years that might obligate us to bail them out in their bad years.

Rest assured, there will be a bust in energy and Exxon will have to mark to market their inventories and will take losses to the extent of the failure of their hedging strategies.